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JNJ Q3 Analysis

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November 07, 2011 – Comments (0) | RELATED TICKERS: JNJ

Board: Value Hounds

Author: LeKitKat

JNJ had sales of $16 billion Q3. That was a 6.8% increase—2.6% organic and 4.2% currency. Domestic sales declined 3.7% and international sales were up 16.4 % and 8.3% of that was organic growth.

Net was $3.2 billion and EPS was $1.15. Synthes impacted net and EPS. Without it net was $3.4 billion and EPS was $1.24. That compares to $1.23 in 2010 on revenue of $15 billion.

Worldwide percentage increase

[See post for tables.]

What happened to domestic sales?

The consumer segment revenue of $1219 million was down 4.5% International consumer increased by 10% --3.3% was operational.

Pharmaceutical revenue declined 6.1% in the US and increased 18.5% internationally.

Med devices and diagnostics was off by 3.7% in the US. International increased by 3.9%[adjusted for an 8.4% forex increase]

In a nutshell, every operating segment was down in US sales in the third quarter.

For 9 months:

Consumer was (9.2%)
Pharma was up 1.4%
Med devices was down 0.4%

The biggest losers in consumer products in the US market were women’s health( -14%) and of course over the counter medications/nutritionals at (24%). The McNeil disaster continues to impact results in OTC and women’s had poor comps due to divestitures[monistat]. Baby, skin care and wound care had positive comps in the US and baby care and skin care had decent growth worldwide.

Baby care +4.1%
Skin care +13.2%
With respect to the OTC/Nutritional return to market:

Expect to see some reintroduction of key products in 2012. Tylenol will be back in time for the 2011-2012 flu season

Sara Michelmore - Brean Murray:

Then, just in terms of the McNeil over-the-counter products. I mean, in terms of how you guys look at what you hopes to get back to I mean what are your latest thoughts on either brand recapture or what you would target the sales to be on the reentry there. If you can give us just any thoughts about how you are looking at the market, in any studies you have done in terms of brand loyalty and things like that?


Dominic J. Caruso - VP, Finance and CFO:

Well, we are not going to give you obviously specifics on particular market share or dollar volume. But suffice it to say, that obviously our folks are ready to launch these great products back into the market and do the very best they can to gain back the consumers.

Now, one bit of data that we saw was that even though private label is taking a significant amount of share in that particular segment of the market. Our research indicates that the trust factor with respect to our products, the McNeil Pediatric products in particular with moms, is still two times the level of the products that are currently available for moms in the marketplace. So we are very encouraged by that.

These products have a great legacy as you know, and I think everyone expects that Johnson & Johnson will return these products at a market in the best possible way. And there will be also innovation as these products return to the market. We talked earlier in the year about innovation and dosing, which addresses a major safety issue with children's pediatric products. So I think you should expect us to do the best that we can, along with innovation, and we are hopeful that the loyalty that these brands have achieved over many years, will stay with us as we begin to bring these products back to consumers, in 2012.


Pharmaceuticals

The older drugs continue to slide as many are off patent and continue to lose to generic competition.


Percent increase/decrease sales of drugs

[See post for tables.]

What happened to domestic sales?

The consumer segment revenue of $1219 million was down 4.5% International consumer increased by 10% --3.3% was operational.

Pharmaceutical revenue declined 6.1% in the US and increased 18.5% internationally.

Med devices and diagnostics was off by 3.7% in the US. International increased by 3.9%[adjusted for an 8.4% forex increase]

In a nutshell, every operating segment was down in US sales in the third quarter.

For 9 months:

Consumer was (9.2%)
Pharma was up 1.4%
Med devices was down 0.4%

The biggest losers in consumer products in the US market were women’s health( -14%) and of course over the counter medications/nutritionals at (24%). The McNeil disaster continues to impact results in OTC and women’s had poor comps due to divestitures[monistat]. Baby, skin care and wound care had positive comps in the US and baby care and skin care had decent growth worldwide.

Baby care +4.1%
Skin care +13.2%
With respect to the OTC/Nutritional return to market:

Expect to see some reintroduction of key products in 2012. Tylenol will be back in time for the 2011-2012 flu season

Sara Michelmore - Brean Murray:

Then, just in terms of the McNeil over-the-counter products. I mean, in terms of how you guys look at what you hopes to get back to I mean what are your latest thoughts on either brand recapture or what you would target the sales to be on the reentry there. If you can give us just any thoughts about how you are looking at the market, in any studies you have done in terms of brand loyalty and things like that?


Dominic J. Caruso - VP, Finance and CFO:

Well, we are not going to give you obviously specifics on particular market share or dollar volume. But suffice it to say, that obviously our folks are ready to launch these great products back into the market and do the very best they can to gain back the consumers.

Now, one bit of data that we saw was that even though private label is taking a significant amount of share in that particular segment of the market. Our research indicates that the trust factor with respect to our products, the McNeil Pediatric products in particular with moms, is still two times the level of the products that are currently available for moms in the marketplace. So we are very encouraged by that.

These products have a great legacy as you know, and I think everyone expects that Johnson & Johnson will return these products at a market in the best possible way. And there will be also innovation as these products return to the market. We talked earlier in the year about innovation and dosing, which addresses a major safety issue with children's pediatric products. So I think you should expect us to do the best that we can, along with innovation, and we are hopeful that the loyalty that these brands have achieved over many years, will stay with us as we begin to bring these products back to consumers, in 2012.


Pharmaceuticals

The older drugs continue to slide as many are off patent and continue to lose to generic competition.


Percent increase/decrease sales of drugs
Prezista continues to grow both in the US and internationally. Quarterly revenue of $316 million puts it in the top 4 performers. Remicade is still the big dog in the portfolio with Q3 revenue of $1408 million. International sales increased over 40% mostly as a result of the territorial gain from Merck.

The new drugs are doing well

Revenue in millions and % change
[See post for tables.]

For 9 months these four medications had revenue of $1427 [$920 million in 2010]million out of total 9 month pharmaceutical sales of $182 billion in 2011.For the first 9 months of 2010, sales were $16.7 billion. Clearly the new medications are contributing to increasing sales.

Medical devices and diagnostics

Cardiovascular of course declined as JNJ exited the coated stent market. If this loss is excluded, growth was at 1%. Growth was largely due to the 12% increase in sales from Biosense Webster [electrophysiology]

DePuy is the orthopedic segment and orthopedics across the sector has been slow.

Hip implant sales worldwide increased 1.7% operationally[no forex]US sales were down 4% and international growth was 8%. Metal on metal hip sales are falling off and there is pressure on pricing for all the orthopedics companies.

Knee sales were even more disappointing with worldwide sales down 4% and US sales declining by 7%. International sales were down 1%.

In diabetes care, international sales drove worldwide 4.4% positive results increasing 9.8%

Ehticon sales increased in both the US and internationally. Worldwide sales were up 6.4%.

Developments

Two new products -- ZYTIGA and INCIVO -- are performing very well early in their launches JNJ does not give early sales results. Incivo has been on board in the US since May 2011 and Zytiga was approved in April 2011.

The European Commission approved INCIVO [Sept 2011] for the treatment of genotype-1 chronic hepatitis C and ZYTIGA [Sept 2011]for metastatic castration-resistant prostate cancer. Neither drug has been in sales long enough to add much to revenue.

JNJ under a consent decree continues to work to bring three manufacturing facilities up to specs. They have increased production of over-the-counter products including certain validation batches for the products previously produced at the McNeil Consumer Health Care Fort Washington facility and the reintroduction of TYLENOL cold and flu severe tablets the for 2011 cold and flu season. Broad reintroduction will start in 2012.

Other pharma news

• NUCYNTA ER received FDA approval for the management of moderate-to-severe chronic pain.

• REMICADE received FDA approval as the first biologic treatment for pediatric ulcerative colitis.
• XARELTO gained a positive FDA advisory committee vote for the prevention of stroke in patients with atrial fibrillation.

The Synthes acquisition is proceeding on schedule –the European Union merger regulation filing was made in September, and Synthes has scheduled its shareholder vote to approve the merger for mid-December. The deal should close in the first half of 2012. it will bring much needed growth to ortho. Trauma is doing far better than orthopedic implants in terms of sales growth.

Ethicon Endo-Surgery will acquire SterilMed. This company recycles medical devices and is part of the growing reprocessing market. Stryker recently made an acquisition in this sector.

In late September, they acquired full ownership of the Johnson & Johnson-Merck Consumer Pharmaceuticals Company joint venture in the United States, that will continue to market products under the PEPCID, MYLANTA and MYLICON brands.

Guidance

At the end of the third quarter, JNJ had approximately $13 billion of net cash--- $31 billion of cash and investments and $18 billion in debt.

Other income [royalty income, gains and losses from such litigation, investments by the development corporation, divestitures, asset sales or write-offs] will range between $1 billion to $1.1 billion. This is an increase from previous guidance reflecting the higher than expected increase in other income in the third quarter.

Sales are expected to increase [on a constant currency basis] 2.5% and 3.5% for 2011-- consistent with previous guidance.

Sales for 2011 are estimated at $63.5 billion. This is slightly lower than previous guidance as the euro weakens.

2011 operational EPS estimates are between $4.83 and $4.88 per share. That excludes the impact of special items and assumes a same average exchange rate for 2011 as seen in 2010

JNJ has not provided a 10Q yet. Until they do, cash flow and the balance sheet are not available for discussion.

Overall, JNJ has seen its historical 10% CAGR slow. The snafu in consumer and the slow implant sales in ortho are having a sustained negative impact in the past year. Synthes will improve ortho but at what cost? Final details are in the works.

Under the terms of the agreement, each share of Synthes common stock, subject to certain conditions, will be exchanged for CHF55.65 in cash and CHF103.35 in Johnson & Johnson common stock. The transaction has an estimated net acquisition cost of $19.3 billion as of the close of business on April 26, 2011, based on Synthes approximately 119.5 million fully diluted shares outstanding and approximately $2 billion in cash on hand as of signing.


Johnson & Johnson expects to pay the cash component of the deal through a combination of cash and the issuance of new debt. The company will not be using ex-US cash for the deal.

With shares being issued, there will be dilution to the shareholder base. It is possible that Johnson & Johnson may resort to share buybacks later to improve EPS. Synthes holders will receive 55.65 francs a share in cash, and 103.35 francs a share in J&J stock. The stock portion of the payment can fluctuate with Synthes investors receiving as few as 1.7098 J&J shares and as many as 1.9672 depending on the U.S. company’s stock price in the days before the acquisition closes.

The acquisition is still far from a done deal



http://online.wsj.com/article/SB1000142405297020380420457701...

EU Extends Probe of Synthes Deal

By LAURENCE NORMAN

BRUSSELS—U.S. pharmaceutical company Johnson & Johnson's $21.3 billion bid for Synthes Inc. has been referred to a second-phase in-depth probe by the European Union's antitrust unit, giving Brussels authorities until March to decide on the case.

In a statement issued early Friday, the European Commission said it has concerns that the proposed deal would limit competition in already "concentrated" markets.

"The proposed acquisition would remove a competitor from some markets which are already concentrated. The commission needs to make sure that effective competition is preserved, in order to maintain innovation and prevent harm to patients," said European Competition Commissioner
Joaquin Almunia.

The commission has until March 19, 2012 to make a final decision. Under the second-phase procedure, it will now take fresh evidence from interested parties.

In a statement, Synthes said it had expected the EU probe because of the complexity of the deal.

The commission said it is concerned that the transaction would "combine two of the leading suppliers of spine devices" and would strengthen the position of both companies in their other main markets.
The antitrust body said that could leave competitors "in many of the markets" unable "to exert a sufficiently strong restraint on the behavior of the merged entity."


Pharmaceuticals is continuing to improve.

Investment in JNJ was contingent on some sort of growth in pharma. They have done good work getting pipeline to market and putting enough marketing behind new product –Stellara—to get revenue going.

The forward dividend is $2.28 and the yield is 3.6%. The payout ratio is 54%. The dividend is the other reason to invest in JNJ.

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